Maruti Suzuki strike ends; analyst advise caution

NEW DELHI: Shares of Maruti Suzuki India rose by nearly 4 per cent on Friday on reports the 14-day-long strike at the company's Manesar plant was called off this morning. In early trade, shares of the company surged over 3 per cent to Rs 1,117.55 on the BSE. However for the year, the stock has plunged over 20%.

The 14-day-long strike at Maruti's Manesar plant was called off this morning after a tripartite agreement was reached between the management, workers and the Haryana government.

Depreciating rupee, growing competition and ongoing strike have hit Maruti Suzuki in the recent past and have weighed on the company's profitability and margins.

According to a report by LKP Securities Ltd, Maruti Suzuki's margins may get impacted on account of higher discounts, yen appreciation & growing competition in FY12.

"We expect EBITDA margins to fall 40 bps to 9.7%, while with demand expected to bounce back in FY13 and yen appreciation getting countered by cooling commodity prices and economies of scale post capacity expansion, we have factored in improvement in margins to 10.4%," said the report.

At 01:22 p.m., shares of the company were trading 2.4% higher at Rs 1102.

Maruti Suzuki has been trading in a downtrend since last one year. The short term and medium term trends are still looking negative in the stock and a breach of Rs 1040 is likely to take the stock lower to Rs 910 in the extreme short term.

Trend reversal is possible only if Maruti is able to maintain above Rs 1200 (200 DMA). So any pull back rally up to Rs 1200 should be used to exit long position in the stock.

Deepak Mohoni, Director, trendwatchindia.com

Maruti Suzuki is plagued by its ongoing strike problems, but the stock has otherwise been quite a good stock for investors. The stock has moved in a range and has not moved in a downtrend. If you look at the last six-seven weeks, it has not really moved very much. I suspect if things get resolved satisfactorily, the stock might make a strong comeback. Not a recommendation to buy yet, but I would not write it off at all.

Shardul Kulkarni, Technical Analyst, Angel Broking

"Short term bottom is in place in Maruti Suzuki and we expect it to move higher. If it closes above Rs 1100, we may see Rs 1170-1175 in the next 2-3 weeks," said Shardul Kulkarni.

Ashwani Gujral, Chief Market Strategist, ashwanigujral.com

It is difficult to gaze the stock. Today they have the agreement, tomorrow evening again the strike will start. I am more comfortable getting into Maruti, once it gets out of the upper end of this range of between broadly Rs 1050 to about Rs 1200.

Then we will get into Maruti. Maruti is probably one of the last choices in this entire group of auto stocks. So right now, it is a bit of an avoid.

Brokerage View:

Earlier in the month, Goldman Sachs in a recent report cut production estimates for Maruti Suzuki Ltd and maintained a 'Neutral' rating with a 12-month price target of Rs 1071, a cut from Rs 1173 target earlier.

The brokerage report says, "Owing to persistent labour strikes at Maruti Suzuki's Manesar plant and supplier Suzuki Power Train, we cut our volume estimates for Maruti Suzuki to 1.2mn units for FY12E (from 1.35mn) with further potential downside should the current impasse continues."

CLSA also maintains "underperform' rating on Maruti Suzuki Ltd with a target price of Rs 1075, a cut from Rs 1210.

"Maruti Suzuki Ltd will see a sharp rise in competition in coming quarters post the recent small car launches by Hyundai and Honda, which will together compete with 50% of Maruti's domestic volumes," said the CLSA report.

"Hyundai's 'Eon' will be the first head-on competition for Maruti's top selling car 'Alto', which alone contributes 25% of Maruti's volumes. The labour strife at the Manesar plant has worsened and will impact Maruti's festive season sales. A stronger Yen will also hurt margins in 2H, especially given weak pricing power," added the report.

Maruti Suzuki has always been holding a market leadership position in this segment with a market share of 80%. Hyundai has a target of selling 1.5 lakh units p.a. of Eon from this new launch. This could easily take away market share of more than 500-600 bps from MSIL in this segment which has never happened in the past.

With ongoing festivities, Maruti Suzuki is unable to cater to the demand, mainly for the new Swift which has an order book of 100,000 units which may get delayed. The company has already stopped accepting any more bookings as the waiting period of Swift has gone up to 10 months.

"The brokerage has a negative outlook on the stock on growing concerns stated above. We further downgrade our earnings estimates on MSIL by 15% each for FY12E and FY13E, thus cutting our target price to Rs.930, maintaining Underperformer rating on the stock," it said.